Important Provisions of the Massachusetts Tax Relief Bill

On October 4, 2023, Governor Healey signed into law the Massachusetts tax relief bill (“[a]n Act to improve the Commonwealth’s competitiveness, affordability, and equity”). The bill contains many tax relief provisions, including changes to the state estate tax and changes to the short-term capital gains tax. The bill also adds a provision that may impact married couples who file their federal income tax returns jointly.

Relevant Changes:

Estate Tax:

• Previously, Massachusetts was tied for the lowest state estate tax threshold in the country, at $1 million per person. The tax was also more aggressive than other states’ due to the so-called “cliff effect”, whereby estates valued at over $1 million were subject to tax on the entire value of the estate. This differs from the federal estate tax, which only taxes assets over the federal exemption (currently $12.92 million per person).
• Under the Massachusetts tax relief bill, the estate tax threshold is increased to $2 million per person for estates of decedents dying on or after January 1, 2023. In addition, the bill grants a state estate tax credit, which relieves the “cliff-effect” discussed above. The estate tax marginal rates will remain the same.
• The bill also changes how the tax on out-of-state real estate and tangible personal property is calculated. To address a constitutional issue with the prior tax, the new bill provides a proportional reduction when a decedent owned out-of-state real estate or tangible personal property. Likewise, the bill is more generous than prior law to out-of-staters who own Massachusetts real estate or tangible personal property.

Short-Term Capital Gains Tax:

• Previously, Massachusetts taxed any gain from the sale or exchange of capital assets held for 1 year or less (i.e., short-term capital gains) at a rate of 12%.
• The Massachusetts tax relief bill reduces the short-term capital gains tax to 8.5%, retroactive to January 1, 2023.

Married Couples Filing Jointly for Federal Tax Returns:

• As you may know, Massachusetts voters approved the adoption of an amendment to the Massachusetts Constitution to establish an additional 4% state income tax (“surtax”) on the portion of the taxpayer’s annual income that exceeds $1 million. The surtax is imposed on income earned beginning January 1, 2023.
• The Massachusetts tax relief bill contains a provision that requires married couples to file a joint income tax return in Massachusetts for any year in which they file a joint federal income tax return, beginning with income earned on or after January 1, 2024.
• This provision is aimed at removing a possible loophole, by which married couples in Massachusetts seek to avoid the 4% surtax by filing separate, rather than joint, Massachusetts income tax returns.